• Dean Ruscoe

What is a Business Exit Strategy?

What is a business exit strategy?*

An exit strategy is a plan for wrapping up your involvement in a business. For most people, that means readying the business for a change of owner. Executing a well thought-out exit strategy can increase your sale price, while ensuring the business continues to thrive after you’ve left.

Do you need an exit strategy?

Whether you intend to leave your business in one, five, or twenty years, you’d be wise to make a plan now. It takes years, not months, to prepare a business for a new owner.

A business exit strategy will help you get ready. And it gives you freedom. If you're ready to sell, you can do it at any time. That gives you options.

How to plan an exit strategy

We asked kiwi business advisors, policy makers and brokers to give their advice on succession planning. Here's a summary of their recommendations:

1. Plan for your most likely buyer

If you’re selling to family, take pains to make everything transparent and fair. You don’t want the transaction to cause tension or conflict between children. If you’re selling to staff, be prepared for staggered payments. They’ll probably start with a deposit and pay you the rest from business income. If you sell to the highest bidder, then get all your records in order as otherwise they won’t have any idea how you operate, or what sort of money you make.

2. Ask how fast you’ll want to get out

Some buyers, such as family or staff, won’t have the cash to buy you out straight away. You might have to keep an interest in the business and stay involved to protect your investment. If that’s the case, you’ll need to negotiate consulting fees. If you want a clean break, you’ll probably be better off selling on the open market.

3. Get your books sorted

Smart buyers will ask to see at least two years worth of clean and dependable financial records. If your bookkeeping isn't all it could be, get it fixed now. And if there’s something you can do to improve profitability, do it as soon as possible. You want that upswing to show in your accounts as a sustainable trend rather than as a recent spike.

4. Make yourself unimportant

No one’s going to buy your business off you if it can’t survive without you. If you have staff, give them the training and authority they need to succeed. Scale back your involvement. Be less available to customers and clients. Delegate big decisions. Go into work less often.

5. Check that you’re organised and systematic

Ensure you have formal (and efficient) processes for getting work done. Who does what, when, and how? Make sure there are protocols to guide all this. Potential buyers will be even more impressed if some things in your business happen automatically. Then they know they won’t have to worry about it. Consider using software for administrative functions like accounting, accounts payable, payroll, inventory and so on.

6. Write down how everything happens

Write a “how to” manual for your business, so that a stranger could pick up the reins and run the business tomorrow. Record every process, including admin. Make a note of the steps you follow for each of these tasks. While you’re at it, write formal job descriptions for employees. And create templates for tasks that are repeated in your business.

7. Figure out how to increase the value of your business

What are the things that make your business great? Do you have a really outstanding product? Loyal customers? Amazing intellectual property? Find the strengths in your business and grow them, so that they become even more valuable. Similarly, figure out the biggest holdbacks and fix them. You’ll need someone from outside the business to provide this assessment. Get your accountant involved. If they don’t have the particular skills you need, they may be able to recommend someone who does.

8. Get a guideline valuation

You won’t know what you’ll get for your business until the day it’s sold, but you can get a rough estimate. Ask for a professional opinion. Your accountant should be able to introduce you to someone, or you could speak to a local business broker. A guideline valuation will help satisfy your curiosity and set realistic expectations. If they predict a lower price than you’d hoped, you might delay your exit, and spend some time building value in the business.

9. Work on a sales pitch

Buyers need to be excited by your business, so come up with an elevator pitch that captures the essentials. Craft a story that explains why you got started, how you’ve grown, and what you’ve achieved. Paint a positive picture of the future, too, but keep it real. Incorporate stats and facts to support what you’re saying.

Exits happen

Exiting your business is inevitable. It will happen whether you’re in control of it or not. So make a plan now and start getting your business ready for the next owner. It’ll help you command a better price, and increase the chance that your business survives.

And remember that anything you do to benefit your future buyer, will also benefit you. You’ll have a more efficient, profitable and easier to manage business.

It’s never too soon to build a business exit strategy.

*Article by Sue Pak, NZ Head of Accounting, Xero

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If you would like to know more about how The Business Exit Company can assist you to prepare your business for sale, just click this link and book a FREE, no-obligation 15 minute phone call in our calendar at a time that suits you to discuss.

To your business sale success.